Effect Of Debt Financing On Financial Performance Among Firms Listed At Nairobi Securities Exchange (original) (raw)
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Makena, K. M. N; Waweru, G & Ithai, J. (2024). Influence of Debt Financing on the Financial Performance of Manufacturing Firms Quoted at the Nairobi Securities Exchange. Journal of African Interdisciplinary Studies, 8(8), 195 - 206 . , 2024
Abstract Firms require capital to finance their business operations and investments. Most firms face a predicament on whether to utilize debt or equity to finance their investments. Consequently, these firms must find the best option and effectively manage their risks. The purpose of this study was to establish the influence of debt financing on the financial performance of manufacturing firms quoted at the Nairobi Securities Exchange. The study employed a descriptive research design. The census method was adopted and a target population of 8 manufacturing firms quoted at the Nairobi Securities Exchange was considered. A questionnaire was the primary data collection instrument while a secondary data collection form was used for collecting secondary data from audited financial statements of the firms. Secondary data was obtained from audited financial statements of the eight firms identified for the study as per institution websites and Central Bank of Kenya annual supervisory reports from 2018-2022. Descriptive statistics and inferential statistics were used and data was analyzed using Statistical Package of Social Science (SPSS) version 29. The study findings established that debt financing had a significant positive influence on the financial performance of manufacturing firms quoted at the Nairobi Securities Exchange. The findings thus establish that firms quoted at the Nairobi Securities Exchange rely on debt financing to finance investment opportunities. The study recommends that corporate managers choose debt financing as a source of financing. Also, to organize the debt market and give corporate entities access to low-cost long-term debt to finance their operations and investments, the government, working with the Capital Markets Authority (CMA) and other corporate sector stakeholders, should develop appropriate policies. The study provides useful information to managers and policymakers on the best financing option to initiate before choosing other financing options. Finally, the study recommends that other studies be conducted to establish the influence of debt financing on the financial performance of manufacturing firms that are not quoted at the Nairobi Securities Exchange. Keywords: Debt Financing, Financial Performance, Financial Structure, Long term debt, Manufacturing Firms, Nairobi Securities Exchange, Short term debt.
The International Journal of Business & Management, 2021
Effects of Debt Financing on Financial Performance of Small and Medium-Sized Enterprises in Homa Bay Town, Kenya 1. Introduction The Kenyan Constitution (2010), defines SMEs as enterprises with employees between 10-100 people and have a turnover of between 5,000 USD and 8 million USD. According to Central Bank of Kenya financial report of 2017, the overall GDP of Kenya was 6.4% of which SMEs contributed 3%. The report also stated that SMEs contributed 98% of businesses in Kenya creating 30% of jobs annually. Many SMEs face challenges of a stable financing cycle, most firms are unable to adjust to sales cycles that is available in the market. Payment to businesses is always done within 90 days which may not work well with most SMEs. Many SMEs opt for debt financing that is less risky and easily available, and contribute to their cash flows positively in the short run as well as in the long run. Financial performance is the deed of performing financial activity in order to realize financial objective within a specified period of time (Metcalf, R. W. and P. L. Titard 1976). They further emphasized that it's a process of assessing the results of a firm's policy and operations in monetary terms. Financial performance may be measured using ratios like Liquidity, Leverage and profitability (Dobbins and Barnard, 2000). Liquidity describes the degree to which an asset can be quickly bought or sold in the market at a price reflecting its intrinsic value i.e. the ease of converting it to cash (Dobbins and Barnard, 2000). Cash flow of the firm determines how well the firm is able to meet its current obligations. A firm with sound cash flow has no difficulties in meeting its immediate obligation. This is testable by the liquidity ratios of the firm. A firm with right composition or preposition of the liquidity ratio is said to have better going concern as opposed to a struggling one. Debt financing ensures that SMEs are liquid at all times; since firms get additional cash from financial institutions. At the same time same time, banks are exposed to risk since the SMEs may not be solvent enough. Therefore, this sought to establish the effect of debt financing on financial performance of SMEs in Homa Bay Town, Kenya. There are two major sources of financing, internal and external sources. Internal sources include profits and financing from the director or business owners. In order to have internal financing, there must be growth in profits and cash flows so that the excess cash can be ploughed back into the business. SMEs can also seek for financing from external sources which can either be formal or informal. Informal sources may be from friends and families, while formal sources include debt financing, capital ventures, new shareholders, debt factoring and many others. Debt financing is always used in case the internal sources are not sufficient or available (Robb and Robinson, 2008). Debt financing involves the
The study focused on the effect of financing decision on financial performance of listed companies at Nairobi Securities Exchange. The specific objectives were capital structure, liquidity decision, dividend decision and investment decisions. The study targeted 66 listed firms at the NSE. Data spanning five years, 2012 to 2016 was collected. Multivariate regression approach was used for analysis. The study findings showed that capital structure has a positive but not significant effect on ROA but a positive and significant effect on ROE. Liquidity decision has a positive and significant effect on both ROE and ROA. It was also established that investment decision has a positive and significant effect on both ROA and ROE. However, dividend decision has a negative and not significant effect on both ROE and ROA. The study recommends that since debt to equity ratio can significantly affect returns on equity and assets significantly; there is a need for listed firms to balance their financing using debts and equity. There is a need to revise the financing policies to incorporate financing with less equity and more debts since it improves the returns. The study also recommends that since liquidity decision has a positive effect on financial performance of listed firms, there is a need for the listed firms to have a balance in their liquidity decisions by ensuring that they have enough current assets to offsets the current liabilities. This enables the day to day running of the business to be more easier and sustainable thus improving performance. The study also recommends that since investment decisions affect performance positively and significantly, there is a need for the listed firms to invest more in firm machinery, plants, equipment and property, so as to enhance the returns form these investments.
Research Journal of Finance and Accounting, 2020
A significant number of the non-financial firms listed at Nairobi Securities Exchange (NSE) have been experiencing declining financial performance which deter investors from investing in such firms. The lenders are also not willing to lend to such firms. As such, the firms struggle to raise funds for their operations. Prudent financing decisions can lead to financial growth of the firm. The purpose of this study is to assess the effect of short-term debt on financial growth of non-financial firms listed at Nairobi Securities Exchange for a period of ten years from 2008 to 2017. Financial firms were excluded because of their specific sector characteristics and stringent regulatory framework. The study is guided by Agency Theory and Theory of Growth of the Firm. Explanatory research design was adopted. The target population of the study comprised of 45 non-financial firms listed at the NSE for a period of ten years from 2008 to 2017. The study conducted both descriptive statistics analysis and panel data analysis. The result indicates that, short term debt explains 45.99% and 25.6% of variations in financial growth as measured by growth in earnings per share and growth in market capitalization respectively. Short term debt positively and significantly influences financial growth measured using both growth in earnings per share and growth in market capitalization. The study recommends that, the management of non-financial firms listed at Nairobi Securities Exchange to employ financing means that can improve the earnings per share, market capitalization and enhance the value of the firm for the benefit of its stakeholders.
A significant number of the non-financial firms listed at Nairobi Securities Exchange (NSE) have been experiencing declining financial performance which deter investors from investing in such firms. The lenders are also not willing to lend to such firms. As such, the firms struggle to raise funds for their operations. Prudent financing decisions can lead to financial growth of the firm.The purpose of this study is to assessthe effect of Long-term debt on the financial growth of Non-financial firms listed at Nairobi Securities Exchange. Financial firms were excluded because of their specific sector characteristics and stringent regulatory framework.The study is guided by Trade-Off Theory and Theory of Growth of the Firm.Explanatory research design was adopted. The population of the study comprised of 45 non-financial firms listed at the NSE for a period of ten years from 2008 to 2017. The study conducted both descriptive statistics analysis and panel data analysis.The result indicates that Long term debt explains 21.6% and 5.16% of variation in financial growth as measured by growth in earnings per shareand growth in market capitalization respectively. Long term debt positively and significantly influences financial growth measured using both growth in earnings per share and growth in market capitalization.The study recommends that, the management of non-financial firms listed at Nairobi Securities Exchange to employ financing means that can improve the earnings per share, market capitalization and enhance the value of the firm for the benefit of its stakeholders.
DEBT FINANCING AND PROFITABILITY: STUDY OF SELECTED COMPANIES IN NIGERIA
ABSTRACT The purpose of this study is to investigate the relationship between debt financing and profitability of seventeen companies listed under industrial goods on the Nigerian Stock Exchange considering a period of three years from 2011 to 2013- Panel data. The data was analyzed by using descriptive statistics, regression and correlation analysis through the EViews3 software. Results of the analysis showed that there is a negative yet non-significant relationship and association between the firms’ debt financing and profitability. Further the results suggest that 51% of total assets in the industrial sector of Nigeria are represented by debt, confirming the fact that they are capital intensive and highly geared institutions; whereas profit ratio was only 3% of total assets in the sector. The study recommended management of the sector should pay attention to other factors that could possibly cause this rather small ratio of profit to total assets when compared to the volume of leverage. The outcomes of the study may guide operators of the industrial good sector and policy planners to formulate better policy decisions as far as the capital structure- debt and profitability are concerned.
Bank Loan and Performance of Firms Listed at the Nairobi Securities Exchange
Research Journal of Finance and Accounting
This study was to establish the effect of bank loan on firm performance, the link being cost of capital and banking relationship. Firms might source valuable advice from their bankers. That advice can add value or not and is a subject of empirical investigation. This study was carried out on all the 65 listed companies at Nairobi Securities Exchange (NSE) between 2013 and 2017. There is relationship, between bank's loans to total asset ratio and firm performance, for a group, when return on assets (ROA) is employed as a measure of performance. There is no relationship when return on equity (ROE) is used as a measure of performance. It is difficult concluding that bank loan influence performance. It is possible that banks offer services to their client indiscriminately. It is not important looking at the direction of the relationship between bank loan and performance. In conclusion, firms cannot rely on bank loans and their relationship with bankers to edge out their competitors and earn superior returns.
Effect of Risk on Total Debt of Companies Listed on the Nairobi Securities Exchange, Kenya
Asian Journal of Probability and Statistics
Despite the availability issue, debt financing continues to be an essential form of funding for businesses. Risks have been a major source of uneasiness for owners, executives, experts, as well as shareholders globally. The Kenyan enterprises have a greater susceptible to variations in currency rates in the nation’s economic climate, which is growing to become increasingly open with an increase in global trade. The study objective is to investigate the effect of risk on total debt of companies listed on Nairobi Securities Exchange. The study was underpinned by tradeoff theory and pecking order theory. The study utilized causal research design. Secondary data was used to collect data from yearly accounting statement from 2007-2011. Panel regression was used to analyze the fixed effect model. The result showed that risk negatively and substantially affects total debt. The study recommended that the management of listed firms should understand the tradeoff theory and pecking order the...
Asian Journal of Probability and Statistics, 2024
Organization expenses result from a company's utilization of long-term debt in its capital structure. One can also characterize a firm's size by looking at its assets. In order for a company to draw in investors, its worth increases with its size. The profitability of a business may be enhanced by including long-term obligations in its structure of capital since the interest paid on such debts is deduction for taxes. Therefore, this study aimed at examining the effect of firm size and profitability on long term debt of listed firms at the Nairobi Securities Exchange. The study was based on trade off theory and pecking order theory. Secondary data was obtained from the firms from 2007-2011. Panel data was used to analyze data observations. The result indicates that firm size had insignificant effect on long term debt of firms. Profitability had significant effect long term debt. The study recommends that larger firms should leverage their greater access to capital markets to secure long term debts financing at favorable terms, balancing the benefits of debt against potential risks. Firms also with high profitability should encourage internal financing sources to reduce reliance on external debt and minimize financial cost.
University of Eldoret, 2015
The main purpose of this study was to analyze Long term debt financing as a determinant of the performance of sugar manufacturing firms in Kenya. The study was guided by the three long term debt financing constructs namely: Corporate bond financing on firm performance, Long term loan financing on firm performance, Operating lease financing on firm performance. The tradeoff theory was used to inform the study. The study adopted a longitudinal research design and a targeted population of 9 and a sample size of 3. Simple random sampling was used to select the respondents. Inferential techniques were utilized in data analysis. Multiple linear Regressions model was used to identify significant predictors of Return on Assets controlling for confounders. Corporate bond financing, long term loan financing and operating lease financing did not have a significant relationship with Return on Equity. Results indicated that: Corporate bond financing and firm performance, (β =1.240, p< 0. 001), Long term loan financing and firm performance, (β =-20.991, p<.004), Operating lease financing and firm performance, (β =13.619, p<.020). The study concluded the following, Corporate bond financing significantly positively affects firm performance, Long term loan financing significantly negatively affects firm performance and operating lease financing does not significantly affect firm performance. The study recommended that, Sugar firms should become less dependent on long term loan financing in their capital structure. There is need for sugar firms to invest more in issuance of corporate bonds. Sugar firms should opt for outright purchase rather than excessive use of operating lease financing. The study contributed to literature review, policy and development of measurements of scale. The study suggests that other studies are needed to explore the effects of long term debt financing on performance of sugar firms in Kenya using predictors of firm performance other than long term loan financing and corporate bond financing.